New Year message from the PRA Get your house in order and hold tight

The PRA has issued two separate letters concerning 2023 priorities to banks active in the UK and UK deposit takers. The letters, which are specifically addressed to Chief Executive Officers, contain key takeaways for senior managers and, unsurprisingly, the impact of the prevailing economic climate on firms' processes and arrangements attract some attention - as does operational resilience. Risk management and the importance of firms being proactive about mitigating both economic and operational factors impacting their businesses and models. . The PRA looks at what firms need to be doing in relation to credit risk and model risk management. We take a look at key issues in further detail below.

• Financial resilience. The PRA expects the operating environment to remain challenging as a result of the volatility in financial markets and the weak global economic outlook. Firms are expected to proactively assess the implications of the changing economic outlook, especially in relation to the sustainability of their business models. The PRA states that its continued focus on financial resilience will comprise ongoing assessments of individual firms' capital and liquidity positions, as well as how these can change. For UK deposit takers, areas of focus will include the impact of changing retail and wholesale funding conditions, as well as scheduled maturities of drawings from the Term Funding Scheme with additional incentives for Small - and Medium-sized Enterprises.
• Risk management and governance. The PRA refers to its review of global equity finance business, undertaken in response to the default of Archegos Capital Management, and the focus the PRA placed on improving counterparty risk management and leveraged exposures. It argues that volatility in markets arising from the Russia-Ukraine crisis and volatility in the nickel and long-dated gilt markets have underscored the importance of a robust risk culture and sound risk management practices. It states that despite its messaging, firms continue to obtain large and concentrated exposures to single counterparties. Firms are expected to have learnt lessons from past events and have ensured that these are embedded through the first and second lines of defence. For international banks, the PRA calls for a comprehensive review of onboarding and due diligence practices, as well as counterparty pricing and margining frameworks. It also expects these firms to carry out a thorough review of their counterparties and stress test counterparty exposures in a manner that takes into account how these frameworks operate in practice. The PRA confirms that firms’ risk management and control frameworks will continue to be monitored through individual and cross-firm thematic reviews.
• Operational resilience. The PRA refers to its Supervisory Statement (SS) 1/21 – "Operational resilience: Impact tolerances for important business services" (see our briefing here) and states that firms should have by now identified and mapped their Important Business Services, set impact tolerances for these and have started a programme of scenario testing. The PRA confirms that it will be looking to see if firms can remain within their impact tolerance for each IBS. Firms are expected to ensure that their IBS can remain within impact tolerances when relying on outsourcing/third party providers. In relation to large and complex programmes of IT change, the PRA expects these changes to be well managed and for associated transition and execution risks to be mitigated. Firms are also expected to manage outsourcing risks (particularly in relation to cloud providers) accordingly. The potential risks posed by cryptoassets to operational resilience is also discussed, with the PRA advising firms to have fully understood the impact on their operational resilience of offering crypto products, and to have met PRA supervisory expectations, as set out in SS1/21, before any material engagement.
• Credit Risk. The PRA expects credit portfolios to be impacted by the challenging economic outlook and geopolitical factors. UK deposit takers are advised to ensure that credit management practices are robust and that portfolios are closely monitored. The PRA expects customer support and collection arrangements to be appropriately scaled and expected credit loss provisions recognised on time. The PRA comments that recent measures taken by firms, such as improvements to underwriting standards, have yet to be tested under the current challenging conditions. The PRA's assessment of credit risk management will involve it looking at firms’ early warning indicator frameworks (as it states that many credit risk metrics are backward looking). Firms are told to expect increased engagement with the PRA, including targeted requests for enhanced data and analysis.
• Model risk. Deposit takers are advised to review the PRA's finalised model risk management principles (expected to be published in H1 2023) and make any necessary changes. The PRA confirms that three key workstreams will feature in relation to Internal Ratings Based (IRB) models: the implementation of the IRB Hybrid mortgage models; IRB Roadmap for non-mortgage portfolios; and IRB aspirant firm model applications. The PRA will also increase its focus on the new Fundamental Review of Trading Book models.
• Real Time Gross Settlement (RTGS). Firms are expected to be ready for the delivery of ISO 20022 messaging in CHAPS on 19 June 2023 as part of the RTGS Renewal programme, and to ensure cut-over to the new messaging standard without interruption to customer payments or liquidity management. The PRA confirms that this will include completing all necessary testing and participating in dress rehearsals and go-live events in full. The PRA calls for firms to be mindful of dependencies occurring between ISO migrations. As preparations for the move to the renewed RTGS system in 2024 continue, firms are expected to be ready to complete testing and training during 2023.
• Data. The letters stress the importance of complete, timely and accurate regulatory returns. The PRA notes that skilled persons reviews have repeatedly revealed deficiencies in the controls over data, governance, systems, and production controls related to regulatory reporting. Firms are expected to consider thematic findings outlined in the PRA's communications on regulatory reporting to inform their submissions. The PRA confirms that it will use skilled persons review in this area in 2023. Firms will be consulted by the PRA in relation to the Transforming Data Collection Programme.
• Diversity, equity and exclusion. The PRA confirms that this will continue to be an area of focus and that it will publish a consultation paper in 2023 setting out proposals to introduce a new regulatory framework on DEI in the financial sector following on from its joint Discussion Paper (DP) 2/21 – "Diversity and inclusion in the financial sector" (see our briefing here).